Break-Even Oil Price Bogeyman Stalks Gulf Economies

Gulf economies are buoyant. Despite regional trouble spots from Bahrain to Egypt to Syria, Gulf executives remain confident. But there’s one cloud peeking over the horizon that analysts and economists are starting to take note of: the rapidly rising “break-even” points of the oil producers whose revenues are driving the regional economy, including its burgeoning non-oil component.

Break even is the oil price point at which revenues from oil sales cover the cost of imports in the various Gulf countries. During the lean 1990s, when oil prices fell well below $50 per barrel, Gulf countries whittled their government budgets down to a nub and tightened their belts. An oil price between $45-$60 a barrel, depending on the country, was enough to break even.

Reuters

As oil revenues have climbed, so too has public spending in the Gulf region.

But as oil prices soared from 2003 — reaching $148 a barrel in 2008 — spending in the Gulf grew as well: massive infrastructure projects like Dubai’s metro, petrochemical plants, and educational cities such as the King Abdullah University of Science and Technology.

More recently, in an attempt to stave off the upheaval of the Arab revolutions around them, Gulf monarchies have turned on the social spending spigots. Saudi Arabia, for example, committed to spending well over $100 billion on unemployment benefits, housing construction, educational grants and other gifts to bestow on its population.

While oil revenues have climbed, “spending is rising even faster,” said Masood Ahmed, chief economist for the International Monetary Fund in the Middle East and North Africa.

Granted a lot of the spending is necessary, and the region so far has been better at eschewing the types of white elephant projects that marked the 1970s oil boom, all the largess has still pushed break-even points markedly higher.

The United Arab Emirates now needs oil prices above about $75 a barrel to break-even, according to the IMF. Saudi Arabia needs $80. Iraq’s break-even is now just below $100. At $140 a barrel, Iran’s is already almost half again the baseline oil price the IMF is projecting.

Rising break-even points went largely unnoticed while oil prices were climbing. But after they crashed during the 2008 downturn then rose again and stabilized well below the peak, the problem has become apparent. In the past two years, spending has continued to rise despite oil revenues tailing off. For now, oil producers have a cushion of tens, and in the case of Saudi Arabia, hundreds of billions of dollars they banked during the past decade.

Most oil exporters, still below their break-even points, even continue to add to their surpluses. But higher spending leaves them vulnerable to a drop in prices, which many are predicting as global oil production is expected to rise while the torrid pace of demand growth from emerging markets may slow.

Even at current oil prices, some exporters will find themselves spending more than they take in — the sort of deficit spending many thought they had sworn off after the 1990s. If the exporters don’t begin paring back their spending, fiscal deficits could begin appearing in the Gulf as early as 2016.